Gold Mar­ket Radar (Jan­u­ary 23, 2012)

For the week, spot gold closed at $1,666.65 up $27.65 per ounce, or 1.7 per­cent. Gold stocks, as mea­sured by the NYSE Arca Gold BUGS Index, fell 3.4 per­cent. The U.S. Trade-Weighted Dol­lar Index slid 1.7 per­cent for the week.

Strengths

• Gold con­tin­ues to attract atten­tion as it remained above its 200-day mov­ing aver­age this week and closed above the 50-day mov­ing aver­age on Fri­day. It had pre­vi­ously crossed below the 200-day mov­ing aver­age on Decem­ber 14 of last year, and only crossed back above on Jan­u­ary 10, giv­ing con­fi­dence for higher gold prices to come for the year.
• Traders in India are say­ing that the cur­rent mar­riage sea­son is being a strong dri­ver for pur­chases of gold jew­elry. They also have said that almost 70 per­cent of gold jew­elry is sold dur­ing the wed­ding and fes­ti­val sea­son, with the coun­try being host to approx­i­mately 10 mil­lion mar­riages a year. Even with cur­rent high prices, peo­ple appear to spend­ing as much, if not more, this year.
• Romarco Min­er­als released drilling updates on Fri­day this week from their Haile Mine, to which the mar­ket reacted pos­i­tively, with shares up 6.0 per­cent for the day. The project in South Car­olina reported an inter­cept of 21.3 meters with a grade of 43.1 grams per ton from the Snake zone and other strong infill results. Ear­lier in the week Romarco reported very encour­ag­ing drill results from its regional gold explo­ration pro­gram in the Car­oli­nas which was pos­i­tive for the share price.

Weak­nesses

• Catch­ing the mar­ket by sur­prise, India’s gov­ern­ment raised the import duty 90 per­cent on bul­lion to 2 per­cent on value from the pre­vi­ous flat rate of 300 rupees per 10 grams. The import duty on sil­ver was also raised to 6 per­cent on value from 1,500 rupees per kilo­gram. Trad­ing was light on new orders com­ing from India, with ana­lysts fore­cast­ing that this could have a sig­nif­i­cant impact on the country’s gold appetite in the long term. As the rupee fell 18.7 per­cent in 2011, this may be a gov­ern­ment reac­tion to mar­gin­ally cur­tail gold buy­ing, but his­tor­i­cally the pub­lic has found other ways to acquire gold.
• Kin­ross Gold took it on the front, with shares tak­ing a nose-dive 21 per­cent on Tues­day after releas­ing news on pos­si­ble delays that would impact the Tasi­ast mine in West Africa and that it was con­duct­ing “a cap­i­tal and project opti­miza­tion process aimed at improv­ing cap­i­tal effi­ciency, project sequenc­ing, and invest­ment returns for its three main growth projects.” Fur­ther­more, the com­pany announced that it expects to record a good­will charge for Tasi­ast in con­nec­tion to the 2010 Red Back acqui­si­tion. The Tasi­ast mine is one of Kinross’s largest sources for future pro­duc­tion growth.
• Senior gold min­ing shares fell bet­ter than 5 per­cent this week while the junior gold min­ing stocks were up about 1.5 per­cent. The sell off in the senior names largely reflects gen­er­al­ists rotat­ing out of some of their “fear trade” posi­tions based on some of the bet­ter than expected eco­nomic num­bers. It is very pos­i­tive though that the junior min­ing stocks are finally catch­ing a good bid after a dis­mal 2011.

Oppor­tu­ni­ties

• China, which is spec­u­lated to out­pace India in the next few years as the largest gold con­sumer, recently added more rea­son to this pre­dic­tion. Some of the country’s lead­ing banks offer accounts that accu­mu­late gold, and are quickly gain­ing atten­tion. One bank, the Indus­trial and Com­mer­cial Bank of China, launched the accounts in April 2010 and drew 2.33 mil­lion investors by the end of Novem­ber, just 19 months after the launch, with 22 tons of gold held. Investors buy as lit­tle as a gram a month through the accounts, which would quickly add up. The Indus­trial and Com­mer­cial Bank of China has more that 200 mil­lion prospec­tive accounts to mar­ket its gold prod­ucts to.
• Eric Sprott, the well-known Cana­dian fund man­ager, recently made pub­lic his reser­va­tions on cycli­cal com­modi­ties, but remained bull­ish on gold and oil. He cited the ongo­ing cur­rent eco­nomic con­trac­tion as the main rea­son for his bear­ish view on iron ore, coal, steel, lead and zinc. He does, how­ever, expect gold to hit a record above $2,000 an ounce this year, with sil­ver not far behind, reach­ing an all-time high of more than $50 an ounce. Strong phys­i­cal gold demand should remain intact with encour­ag­ing import num­bers com­ing from China and Turkey late last year. He recently filed last week to launch a plat­inum and pal­la­dium prod­uct which would allow investors to redeem the phys­i­cal metals.
• Argen­tinean provin­cial laws ban­ning the use of cyanide in gold processes were repealed for the Rio Negro province, giv­ing a fur­ther boost to the min­ing sec­tor for the coun­try. Pan Amer­i­can Sil­ver said this week that changes to the min­ing leg­is­la­tion in this province will allow the com­pany to advance its Calcutreu gold devel­op­ment project located in the province. Argentina’s min­ing indus­try is con­tin­u­ing to expand with a record $2.57 bil­lion in invest­ments last year.

Threats

• In the midst of earn­ings sea­son, com­pa­nies are report­ing on aver­age much higher oper­a­tional costs, namely due to increases in labor, trans­porta­tion and energy prices. This is a theme through­out the indus­try, with costs esti­mated to have increased 10 to 15 per­cent in 2011. Increases in sus­tain­ing cap­i­tal have also been creep­ing upwards, giv­ing advan­tage to the senior names due to their pre-established economies of scale.
• Fol­low­ing the increas­ing num­ber of its African neigh­bors, Zambia’s gov­ern­ment has intro­duced a num­ber of poli­cies aimed at tight­en­ing the country’s boom­ing min­ing sec­tor. Ana­lysts view the changes in Zam­bia as part of a broad­en­ing shift through­out the con­ti­nent toward resource nationalization.
• The Con­gres­sional West­ern Cau­cus notes on its web site under “Job Killing Pol­icy #10” that “the EPA has also declared the min­ing indus­try their num­ber one tar­get for writ­ing rules pur­suant to CERCLA §108(b) (Super­fund) to require finan­cial assur­ance. An EPA finan­cial assur­ance pro­gram will be duplica­tive of fed­eral land man­age­ment agency and state pro­grams which already have exten­sive envi­ron­men­tal pro­grams and finan­cial assur­ance require­ments in place. Worst-case sce­nario bond­ing by the EPA will cause some exist­ing mines to close pre­ma­turely and pre­vent new mines from open­ing by unnec­es­sar­ily tying up cap­i­tal that would oth­er­wise be used to cre­ate new wealth and jobs.” His­tor­i­cally, states have had the author­ity over what could be done on pri­vate land but recently the EPA has been assert­ing that they have author­ity if air or water might come in con­tact with development.

Frank Holmes is CEO and chief investment officer of U.S. Global Investors, Inc., and a Toronto, Canada native, which manages a diversified family of mutual funds and hedge funds specializing in natural resources, emerging markets and infrastructure. The company’s funds have earned more than two dozen Lipper Fund Awards and certificates since 2000. The Global Resources Fund (PSPFX) was Lipper’s top-performing global natural resources fund in 2010. In 2009, the World Precious Minerals Fund (UNWPX) was Lipper’s top-performing gold fund, the second time in four years for that achievement. In addition, both funds received 2007 and 2008 Lipper Fund Awards as the best overall funds in their respective categories. Mr. Holmes was 2006 mining fund manager of the year for Mining Journal, a leading publication for the global resources industry, and he is co-author of “The Goldwatcher: Demystifying Gold Investing.” He is also an advisor to the International Crisis Group, which works to resolve global conflict, and the William J. Clinton Foundation on sustainable development in nations with resource-based economies. Mr. Holmes is a much-sought-after conference speaker and a regular commentator on financial television. He has been profiled by Fortune, Barron’s, The Financial Times and other publications. Read more from the author/contributor here.

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